Battle rages for control of lucrative Lotto

Hosken Consolidated Investments wants a ruling that Ithuba was not entitled to repay a portion of the loan it granted it in 2015 early. Photo: Cindy Waxa/African News Agency (ANA)

JOHANNESBURG – National lottery operator Ithuba and Hosken Consolidated Investments (HCI), the owners of Tsogo Sun, are embroiled in a bitter legal battle for control of the lucrative lottery business - with HCI demanding R5 million a month from Ithuba in management fees.

At the heart of the dispute is the multimillion-rand loan that HCI granted to Ithuba in 2015 when it won the contract to operate the national lottery.

In legal papers, HCI wants arbitrators to rule that Ithuba was not entitled to repay a portion of the loan it granted it in 2015 early. HCI further wants arbitrators to rule that it is entitled to exercise oversight over Ithuba.

HCI in 2015 stepped in to provide investment capital to Ithuba to the tune of R325m after Ithuba struggled to get funding from banks due to a legal challenge from erstwhile lottery operator Gidani, which wanted the courts to set aside the government’s decision to award Ithuba the licence to operate the lottery.

The deal between Ithuba and HCI was initially structured into 30 percent preference shares and 70 percent debt.

The agreement was later restructured, resulting in the entire funding converted into debt.

The agreement also makes room for HCI as a lender to step in in the event that certain debt-service coverage ratios (DSCR) were not met by Ithuba.

“On January 18, the claimants (HCI) furnished the respondents with the first election notice in terms of which the claimants elected to exercise their rights of oversight,” HCI argues in its head of arguments.

“Several early trigger events subsided at the time, being that the DSCR for the measurement period ended on July 31 and August 30 was less that 1.35:1 and that the second second respondent (Ithuba) breached the financial covenants by unilaterally implementing a financial model that differed materially from the base case financial model forming part of the governing Agreement in respect of the second respondent’s liability for salary costs.”

The DSCR measures the ability of a company to use its operating income to repay all its debt obligations, including repayment of principal and interest on both short-term debt and long-term debt.

Ithuba Holdings was announced as the third national lottery operator and they began operations on June 1, 2015.

Ithuba said that the shorter the period over which a DSCR is measured, the greater the impact will be of a drop in earnings or a spike in expenditure.

“It was always anticipated that Ithuba would have a negative cash flow available for debt service (CFAD) in the first months of operation. Mr Govender (HCI’s financial director) conceded as much in cross-examination. It would be extraordinary if a negative CFAD in the first month of operation would entitle HCI to exercise step-in rights in perpetuity,” Ithuba said in legal papers.

“Remarkably. That is the very essence of HCI’s argument. It is an untenable argument, because it yields an outcome that makes no commercial sense and is indicative of gross opportunism.” The souring relationship saw Ithuba deciding to settle its debt to HCI early.

On July 22, Ithuba paid R133m of the HCI Treasury Loan. This was followed by a R50m payment of the HCI Treasury New Loan. The two payments were followed by a letter from Ithuba to HCI, informing them that Ithuba has cancelled the governing, restructuring and management agreements it had with HCI.

The cancellation letter was followed by a payment of R66m to HCI and a further R166m as early payment of the HCI Holdco New Loan.

However, HCI said it does not accept the R166m paid into its account as repayment of the HCI Holdco New Loan. HCI said it invested R150m in the the second respondents by subscribing for preference shares that would run the course of eight years for capital to be repaid in three equal instalments.